Stocks rose driven by commodities and large cap stocks. Malaysia stocks were generally higher last week as large capitalisation stocks rose on oil price which continued to push well above USD80 a barrel and further announcement on reopening (interstate travelling). The KLCI flirted with the 1,600 level, rising by 2.2% for the week. On YTD basis the KLCI remains a major underperformer versus the region and is still down by 1.8% for the year (Table 1).

“Pandemic-positive” small and mid-caps still favoured. Our general theme for the market essentially evolves around mid-to-small capitalisation stocks that are direct beneficiaries of reopening of the economy, including commodities-related. Indeed, the past year has shown large divergence in performance between the KLCI and the FBM Mid-70 and also small cap indices (Table 1). Smaller stocks have greatly outperformed the KLCI as a result of superior earnings growth due to their involvements in businesses that we term as “pandemic-positive”.

Foreign flows showing continued vigour. For month-to-date October net foreign inflows amounted RM985m, giving rise to a total of nearly RM3bn of foreign buying since August – the highest for a 2-month period since 2018. Indeed, foreign inflows have been a critical element in the performance of large-capitalisation stocks, particularly the KLCI, and this could help offset year-end selling by local institutions for dividend-payment purpose.

KLCI closing gap on region as vaccine rate is game-changer. With the country’s adult vaccination rate higher than 90% and well above most ASEAN countries, Malaysia will be coming from a position of strength to fully re-open its economy and borders at a much faster pace. We remain steadfast in our commodity-related and re-opening themes which we introduced since 4Q20. We continue to favour plantation on unrelenting earnings momentum (Genting Plant, Hap Seng), consumer (Padini) oil & gas on recovery (Hibiscus, Pet Dag), plus opportunities on construction stocks as beneficiaries of the 12 Malaysia Plan and an expansive Budget 2022. Our tech recommendation is slated for longer term (Inari, Myeg), as semiconductor stocks weakness may persist on cyclical peak demand concern, but global 5G acceleration provides support for certain sub-sectors.

A sustained commodity prices could be KLCI’s major driver

Commodity prices have stayed firmly on the upside with crude oil price benefiting from quicker-than-expected demand recovery, supported by a myriad of supply issues beginning with adverse weather hitting oil facilities in the US in August, followed by an energy crisis affecting China, plus shortage of coals. Meanwhile CPO prices continue to rise to record levels with near-term futures at RM5,000 per tonne. Additionally, there could also be greater investors’ demand for re-opening sectors such as construction, building materials, including selected consumer-oriented such as retailers, in our view. We also think that there will be some repositioning towards the infra-related sector as a bigger-allocation for the 12MP began in earnest in 2022.

Source: BIMB Securities Research - 18 Oct 2021